This article was recently published in The KnowList Report.
Stuart Barr analyses the growing trend for organisations to select cloud-based off-the-shelf systems instead of building their own in-house solutions.
In these tricky economic times with downward pressure on internal budgets, alternative fee-arrangements and an expectation from clients to deliver ever more value, there are difficult decisions to be made about the best way to provide new client facing services. This inevitably involves technology and needs to be put in place quickly and efficiently.
Until fairly recently, the installation of new systems has required an army of developers, system administrators, additional data centres, a long lead time and large budgets to build and run applications in-house. Now off the shelf cloud based services offers a real alternative that has some potentially massive advantages.
Own vs. rent
Often the debate around cloud computing is simplified into a Capital Expenditure (CapEx) versus Operating Expenditure (OpEx) debate. This is an important consideration but there is more to it than that. The real question is about whether a firm needs its own software and the infrastructure it runs on, or it can simply rent it.
With software as a service, firms are effectively renting it for a period of time (usually a year for enterprise software) and after that year, a firm can either switch to something else or continuing using it for another year. The real difference with building and managing your own software in-house is that firms are making a long-term commitment and investing in it up front. For many, this can make it harder to be flexible if requirements change. It also significantly increases the costs of switching to another solution down the line.
Cloud-based software is available immediately off-the-shelf with virtually no lead time and is constantly evolving and being upgraded. It means the customer is always using the latest technology without any additional effort. If the customer doesn’t like it, they can simply switch to another provider because they’re not tied to it for the long-term.
A good analogy is that of buying a car outright or leasing it on an annual basis. If you buy it, you have to fund the full-value of the car in one lump sum and then you are responsible for maintaining and servicing it for its entire lifetime, or at least until you sell it. After five years, it will have depreciated significantly and be out of date compared to the latest models available.
If you lease the car instead, a service and maintenance contract is normally included and at the end of each year you can upgrade to the latest model or switch to another car entirely and you don’t need to find any up front cash to buy it.
Going back to technology, the best option for an organisation depends on its culture and the nature of the software or service. However, you don’t need to look very far these days to see the increasing number of companies that are moving key business software into the cloud for email, document management, client relationship management (CRM), extranets and even intranets.
Compare apples with apples
The important thing to consider when looking at the financial side of the equation is to focus on the full five-year software lifecycle.
The cost of a cloud-based solution over five years is usually pretty simple to work out. A simple multiplication by five should suffice (assuming your requirements and usage remain constant) and perhaps a little more for inflation.
In order to compare that accurately against building your own software and hosting it in-house, you have to take into consideration all aspects of the development, infrastructure and operations teams that will be responsible for delivering, maintaining and running it over the full five years. There is also the lead-time it will take to actually deliver it, which can be significant in the case of more complex solutions.
Often, organisations make the mistake of only looking at the initial capital outlay in year one and don’t take into account the full cost of maintenance and development of new features that will need to be added in subsequent years in order for the solution to remain competitive and relevant.
Organisations also need to be aware of “scope creep” as the true cost of delivering software is often significantly underestimated in the initial analysis phase. Due to shifting internal requirements, a 50% or higher increase in budget is not unusual.
Focus on delivering business value
Ultimately, technology is just an enabler for an organisation to do business and provide a service to its clients. It’s easy to lose sight of this simple fact and look at technology as a differentiator and the key to a competitive advantage.
The reality is that technology is increasingly commoditised and at the same time becoming ever more sophisticated. This means it’s a lot harder for any organisation to truly differentiate itself based on technology. A specialist technology vendor will be able to do the same thing more quickly, cheaply and effectively than you and will sell it to all of your competitors for a much lower price.
What really differentiates a professional services organisation is the service it provides, its specialist knowledge and its experience. Clients don’t care whether firms deliver that via the same software as competitors. They just focus on the firm’s output.
Most organisations, particularly those in the same industry vertical, have very similar requirements. Imagine if every company built their own email or word processing software. Would that make sense? The same is true of virtually all desktop or cloud software these days.
The best way to deliver real value is for organisations to roll-out technology that is swift and agile. It needs to respond to the business’s requirements quickly and enable it to provide its clients with the best possible service. Cloud-based software does this by enabling rapid deployments with constant upgrades and improvements. Spending considerable time and money building in-house software is not a good use of scarce IT resources. We believe it is much better to let software vendors take care of that so that firms can focus on being the best at what they do.
